Fraud can catch you out in so many ways, and the fraudsters are getting smarter.
“Y&X” is a fraud of around Tk6,000,000,000 (just over US$70m). Around 20+ garment factories in Bangladesh have seemingly been stung for this amount by UK and Chinese criminals working in coordination. For some of the factories, this may mean closure and the loss of hundreds of local jobs.
The story started over the summer. At PrimaDollar, we provide trade finance to supply chains across South Asia, working from our local offices in Dhaka, Karachi and our representatives across India.
Our trade finance is non-recourse – which means that when we fund an export trade, it is at our risk. We pay the factory against the shipping documents and it is our task to collect from the buyer later.
We were approached by a number of local buying houses (agents) and factories across Bangladesh asking us to finance trades for a new buyer, Y&X Home Limited, based in the UK. They were placing large purchase orders into the Bangladesh market.
On closer investigation, “Y&X Home Limited”, the proposed buyer, was a newly-established company with no track record. In itself, this does not mean that we cannot provide finance. When we are offered a buyer that is relatively new and small, we start to dig into the source of their business and what they will do with the ordered products. If we can see how the supply chain is working end-to-end, then we can often step in to help individual steps in the chain to work efficiently. For example, if we can see the end-buyer (the off-taker) and verify their purchase order, then we can often finance the agent in the middle.
But whilst Y&X talked a good story, they would not connect us to their off-takers and we could not verify the supply chain – so we advised our clients that the counterparty risk was unacceptable.
And here the story takes a wrong turn. As you can see from the numbers, many garment factories have been taken in by Y&X. Our understanding is that orders amounting to over 5m pieces were placed and sourced, all on credit, and none supported by LC.
How did the fraud work?
The clue is at Y&X Home Limited itself. Checking the records at Companies House in the UK, we can see that there are two directors (who may both be innocent, by the way) but this is where suspicion starts to build. One of the directors has a South Asian name, the other has a Chinese name.
It seems that the buyer (Y&X) was able to insist that local factories use a nominated Chinese supplier for the fabric and trim used in the production of the garments. So local factories have put cash out to a Chinese supplier, relying upon collecting later from the UK buyer after they have shipped the goods. The buyer insisted on “open account” terms, also called working on sale contract, so there is no cash down, no LC, and factories have to ship first and get paid later.
The order volumes were also split across more than 20 suppliers via two local buying houses, so that suspicion was not raised by the quantities involved from such a new player.
The fraud has now unravelled. Containers full of garments have arrived in UK ports and are now sitting on the dock-side unclaimed. After more than 30 days, and with no sign of the buyer – exporters have understood that they have been tricked.
And some factories are nursing pre-shipment losses as well as post-shipment, since they have made the goods but not yet shipped. Losses arise even if the production is still in the factory.
Some questions still remain, and all is not lost. The factories who have shipped goods can recover the garments from port by paying forwarders and covering the demurrage charges. They can then sell the goods in the offshore aftermarket, albeit at quite a loss. Factories who have not yet shipped can re-label and perhaps find other off-takers. Moreover, a lot of the material from China would have been brought in on credit, and some suppliers may find ways to avoid paying for the material that they have used.
But still, this has been shock to the marketplace, reminding everyone of the importance of taking care over counterparty risk. This is not just the risk of shipping goods out before payment – financial risks accumulate from the moment that the purchase order is accepted.
And, of course, this brings us back to PrimaDollar and our role in the market.
There is increasing pressure on exporters work on sale contract with their international buyers – which means no cash down, no LC and the buyer will pay after the goods have shipped.
Buyers will always prefer this model, as it can give them positive cash flow, and their banking lines are not being used. It boosts their equity value, improves their financial ratios and ensures that buyer finance teams can meet their internal targets.
In these situations, work with us. PrimaDollar can provide you with a payment guarantee before shipment – either in the form of a sight letter of credit (issued by Barclays Bank in the UK), or issuing our own “CAD Guarantee”, which is cheaper, quicker and simpler. With our system, the buyer risk is transferred to us. And if we decline a trade, then you should think twice about proceeding.
If you would like further information, here are some further links to local media (one in English, one in Bengali):